Deflation can cause widespread bank crises for all of the following reasons except:
A) a decline in the value of borrowers' net worth but not their liabilities.
B) borrowers' default rates increase.
C) bank balance sheets deteriorate as the level of economic activity decreases.
D) information asymmetry problems decrease during deflationary periods.

Question

Quizplus · Accepted Answer

Deflation can cause widespread bank crises due to borrowers' net worth declining and default rates increasing, as well as banks' balance sheets deteriorating as economic activity decreases. However, information asymmetry problems would not decrease during deflationary periods, as lenders would still have less information than borrowers regarding the likelihood of default. Therefore, choice D is the correct answer as it is the only option that does not contribute to the risk of bank crises during deflation.

Deflation Can Cause Widespread Bank Crises for All of the Following